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The headline US CPI inflation rate increased to 7.0%

Posted: 13th January 2022

Trade ideas & Daily market report January 13th 2022

Market highlights.

  • The headline US CPI inflation rate increased to 7.0% while the underlying rate was slightly above forecasts.
  • Risk appetite posted net gains after the data with some relief that the rate was not even higher.
  • Markets were more optimistic over the global growth outlook.
  • The dollar dipped sharply following the data with a retreat to 2-month lows.
  • EUR/USD strengthened to 8-week highs near 1.1350 despite an unconvincing Euro performance.
  • Sterling held firm with fresh 2-month GBP/USD highs as the dollar retreated.
  • Commodity currencies posted 2-month highs on strength in energy and metals prices.
  • Oil prices were boosted by firm risk appetite and expectations of strong demand.
  • Precious metals posted net gains as the dollar weakened, but held below 2022 highs.
  • Solid risk appetite again supported bitcoin.

EUR/USD

Eurozone industrial production increased 2.3% for November with a year-on-year decline of 1.5%.  ECB council member Villeroy stated that we are very near to the peak in inflation, although markets remained unconvinced over the central bank commentary on inflation. There was little impact from the data with caution prevailing ahead of the US inflation data while speculation over a shift in ECB policies this year continued to curb potential Euro selling.

US consumer prices increased 0.5% for December and marginally above consensus forecasts. The year-on-year inflation rate increased to 7.0% from 6.8% which was in line with expectations and the highest figure since 1982. Energy prices declined slightly on the month with a 29.3% increase over the year.

Underlying prices increased 0.6% on the month compared with expectations of 0.5% with the year-on-year rate increasing to 5.5% from 4.9%. This was slightly above market expectations of 5.4% and the highest rate since 1991.Used car and truck prices increased 3.5% on the month with a 37.3% annual increase while apparel prices increased 5.8% over the year.

Although the data overall was marginally above consensus forecasts, the dollar failed to gain any traction and selling pressure gradually increased into the European close. EUR/USD strengthened to 8-week highs just below 1.1450 as commodity currencies also posted strong gains.

The Fed’s Beige Book reported a modest expansion of activity across all districts while growth expectations moderated slightly. There was some evidence that bottlenecks were easing, but there was still strong upward pressure on wages as labour markets remained very tight.

The dollar was unable to regain ground on Thursday and retreated to fresh 2-month lows with EUR/USD holding around 1.1440 in early Europe as commodity currencies held firm.

USD/JPY

The increase in Chinese new loans slowed to CNY1130bn for December from CNY1270bn the previous month and below market expectations. The total increase in social financing also slowed to CNY2370bn from CNY2610bn in November with markets continuing to monitor domestic coronavirus developments.

Although the US inflation data overall was slightly above market expectations, US Treasuries rallied after the data with the 10-year yield retreating to around 1.73%. There was a muted reaction in equities and USD/JPY initially retreated to near 115.00 against the yen.

Cleveland Fed President Mester stated that the case for a removal of accommodation is very compelling, maintaining expectations of a March rate increase, but the dollar failed to gain support. A break below the 115.00 level triggered further USD/JPY selling with a slide towards 114.50 before the pair stabilised.

Rhetoric from regional Fed officials remained hawkish with San Francisco head Daly commenting that she definitely sees a rate hike in March while Philadelphia President Harker stated that 7% inflation is very bad and that he would be open to more than three rate hikes this year if required.

Asian equities were unable to make headway as Tokyo raised its coronavirus alert level and USD/JPY traded just above 114.50 with EUR/JPY just above 131.0.

Sterling

Sterling held a firm tone in early Europe on Wednesday, but was unable to secure further traction. There was speculation that higher yields have already been priced in and markets were also monitoring political developments closely with Prime Minister remaining under pressure as he was forced to apologise in the House of Commons.

International developments dominated during the day and overall global risk appetite held firm during the day with strong advances in oil and commodity currencies helping to underpin Sterling sentiment. GBP/USD pushed to fresh 2-month after the US inflation data with a move to test 1.3700, but EUR/GBP held around 0.8350.

Markets will continue to monitor political developments, although yield and risk trends are likely to dominate. Overall sentiment held firm on Thursday with GBP/USD just above 1.3700 while EUR/GBP traded just below 0.8350. Markets will be monitoring Bank of England rhetoric very closely in the short term ahead of February’s meeting.

Swiss franc

The Swiss franc has tended to be under pressure in 2022, but the currency regained ground on Wednesday. Although there are expectations of higher nominal US rates, real rates will remain highly negative and the franc also gained some support from expectations that the currency will continue to be an important inflation hedge over the longer term. EUR/CHF retreated to around 1.0450 while USD/CHF posted sharp losses to near 0.9130 at the European close.

EUR/CHF edged higher to 1.0460 on Thursday with USD/CHF around 0.9145 as global developments remained a key influence.

AUD/USD + USD/CAD

The Australian dollar held steady into Wednesday’s New York open and then posted strong gains following the data. As equities posted gains and the US currency retreated, AUD/USD posted a strong advance to 7-week highs around 0.7290.

Sentiment held firm on Thursday with some optimism over coronavirus developments, although AUD/USD was held below the 0.7300 level.

The Canadian dollar was initially hampered by pressure for a correction, but gains fresh support from a further advance in oil prices and a weaker US dollar.

In this environment, USD/CAD retreated to 8-week lows to test the 1.2500 level.

USD/CAD found strong support close to 1.2500, although the pair edged below this level on Thursday as oil prices held firm.

NOK+ SEK

The Norwegian krone secured further support from gains in oil prices and there were also expectations of a further increase in interest rates at the March policy meeting.

EUR/NOK retreated to near 9.92 and traded just below this level on Thursday with USD/NOK at 8-week lows around 8.66.

The Swedish krona secured net support from solid risk conditions with EUR/SEK retreating to near 10.23 and USD/SEK breaking below 9.00 to 8.94 with markets monitoring any Riksbank commentary on monetary policy.

Equities

European equities secured a tentative advance in early trading with hopes for a medium-term easing of coronavirus pressures. Gains on Wall Street also posted net gains which helped underpin sentiment.

Major UK stocks again gained support from strength in the energy and commodities sectors with markets taking an optimistic stance towards the earnings outlook. Domestic influences were limited with a 0.8% advance for the FTSE 100 index.

Wall Street equities were resilient after the US inflation data with some evidence that supply-side pressures were close to peaking with the dip in bond yields also providing relief and the S&P 500 index gained 0.3%.

US futures edged lower on Thursday with Asian equities slightly lower amid concerns over tighter financial conditions.

Japan’s Nikkei 225 index declined 1.0% amid a weaker dollar with a 0.5% gain for the Australian ASX index as commodity prices gained ground.

China’s Shanghai index declined 1.2% amid further concerns over the real-estate sector with Hong Kong’s Hang Seng index 0.2% lower in late trading.

Commodities

Oil prices posted further gains into the New York open with optimism that the Omicron impact would be limited and that demand would gain strongly later in the year.  A weaker US dollar and firm risk conditions also provided net support

EIA data recorded an inventory draw of 4.6mn barrels for the week compared with expectations of around 2.0mn, but there was a huge build in gasoline stocks of 8.0mn barrels.

Despite hesitation after the data, WTI posted a strong advance to 2-month highs just above $83.0 p/b.

There was a limited correction on Thursday with WTI close to $82.25 p/b and Brent around $84.25 p/b.

Precious metals were supported by a weaker US dollar and retreat in US bond yields.

Buying was tentative, but gold posted a net advance to just above $1,825 per ounce with silver also advancing to near $23.20 per ounce.

There was little change on Thursday with precious metals unable to post 2022 highs.

Cryptocurrencies

Cryptocurrencies edged higher into Wednesday’s New York open and then posted strong gains following the US data.

Crypto assets were underpinned by firm risk appetite and a weaker dollar as investors moved back into riskier assets. Bitcoin posted a strong advance to around $44,000.

Coins struggled to make further headway on Thursday with bitcoin held below $44,000 as risk appetite stabilised.

Ether also posted a strong net advance to near $3,400 into the European close and held around $3,350 on Thursday.

Calendar

Major events for the day ahead: (times in GMT)

13.30: US producer prices

13.30: US jobless claims

15.00: Fed Governor Brainard hearing